If the government can assure free or subsidized medicines to low-income patients, the relatively well-off can pay market-determined prices. Photo: Hemant Mishra/Mint

Investors in pharmaceutical companies are a worried lot. Their sector has been underperforming for a while now, with only a few companies having recovered. The government has floated a draft pharmaceutical policy, which they should take note of considering India is the second biggest market by revenue, after the US, for most large companies.

The draft policy paints a picture of an industry in good health. It is predominantly privately run, is thriving, it earns half its revenue from exports, it employs two million people and makes high-quality drugs at affordable prices.

The need for a new policy may seem unnecessary then, if all is well. But the government has identified some concerns and then proposed measures to tackle them. Many of these measures betray a lack of confidence in free markets and in fact the proposed policy measures could create new problems.

One, it wants to encourage domestic production of intermediates, since it believes this affects the country’s drug security. India relies on China for a large portion of its intermediate supplies. The government traces this shift back to the price control regime, where companies sought and found cheaper raw material sources to protect their margins.

Well, it’s entirely rational for companies to seek cheaper material sources. Indian companies still make intermediates but only when it’s viable to do so, either as a captive material source or to sell. APIs form a relatively small part of their sales though. API is active pharmaceutical ingredient and the main input in making a formulation.

The draft policy proposes that all APIs that can be made locally should attract peak customs duty. And, formulations made from locally produced APIs should get preference in government contracts and these will also be taken out of price control for five years, and subsequently the price control will be linked to the indigenous content of formulations.

This does not make sense. If the objective of price control is to make essential medicines affordable, an exemption defeats the purpose. Also, if formulations made with domestic API turn expensive, won’t they become uncompetitive? Linking indigenous content to price control seems a recipe for compliance nightmares and corruption. Other options should be explored, such as developing alternative sources of these intermediates. Or, the government can give subsidies to domestic producers to equalize the cost differential over imported intermediates.

Not all the policy proposals are so daft. Among the good things, the draft policy proposes that foreign registration fees and audit of plants from where intermediates are being imported, be done according to standards followed by regulators in large pharmaceutical producing countries. That is reasonable to expect, considering it proposes to improve domestic quality standards as well.

On the quality control front, it proposes a stricter regimen for giving approvals for generic drugs, but approvals will be quick, and the government has proposed better quality control measures including annual inspections. It also says self-certification should be allowed till the regulator is well-equipped, but does not propose a deadline for it. All government procurement should be done from World Health Organization-compliant units, it says, with smaller units getting more time.

The draft policy reiterates the government’s intent of prescription of drugs by their generic and not brand names. It proposes an exemption to fixed-dose combinations and patented drugs. Again, exempting fixed-dose combinations leaves the door open for circumventing the rule and creates new complications. But generic prescriptions can pose a significant challenge for domestic companies.

Two more proposals interfere with how companies do business. The policy proposes a ban on loan licensing, a practice where one company uses another’s facilities to make a drug. The policy also wants to end outsourcing, where one company with a licence makes a generic drug in multiple brand names for multiple companies, which is sold at different prices. It wants to ensure a producer makes one generic drug under one name and sold at one price.

This part of the policy draft is a bundle of contradictions. If the proposal to go generic-only is implemented, then the brand anyway does not matter. If quality is the concern (as mentioned in the loan licensing proposal), then the proposed new quality control regime should take care of it. Lastly, essential drugs are anyway under price control, so it should not matter how a drug is made or marketed. Where a drug is not under price control, then the government anyway has no role to play. Indeed, this part of the draft policy is not only steeped in distrust of the market, but could well have been bizarrely penned by a bunch of Stalinist apparatchiks.

On price controls, the draft policy proposes making changes to the drug pricing regulation, saying it wants to separate the government and the regulator’s role. Some of the proposals appear to indicate the government’s desire to control which drugs are added to the essential medicines’ list and the subsequent revision of their prices. This part implies that the government wants to limit the addition of drugs to the price control list. Industry will welcome it.

When the policy says drug pricing will be made “poor-oriented”, it shifts the burden of public healthcare to private enterprise. These are run by entrepreneurs and where listed, minority shareholders own a stake in them too. Adequate return on capital and growth in valuations is what motivates investors to invest or stay invested in these companies. A conducive policy environment helps in that.

If the government limits their pricing power, and imposes restrictions on how business is done, but still wants them to invest in better quality control, it can limit their growth and profitability. Valuations could suffer. On the other hand, smaller units may struggle and close shop, increasing the market for bigger companies.

Finally and most importantly, the government should realize that nobody can substitute its role when it comes to providing healthcare (which includes medicines) to the poor. If it can assure free or subsidized medicines to low-income patients, the relatively well-off can pay market-determined prices. That can meet the objectives of both the government and the private entrepreneur, and ensure the industry continues to prosper.